06/17/2004
Energy Outlook
Good thoughts on the state of the oil industry.
Exxon Mobil Chairman and CEO Lee Raymond Excerpts from a speech to the Woodrow Wilson International Center for Scholars, June 7, 2004
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Fundamentally, oil will remain a commodity and the U.S. will remain only a participant in the world market. Like it or not, we in the U.S. are only one of several players in the global supply and demand balance. In any future energy outlook, we cannot pretend otherwise
Now energy use is rising most rapidly in the developing world, partly because this part of our world is experiencing faster economic growth than the developed world, and partly because developing countries use energy less efficiently. In fact, the developed world uses only one-third the energy of the developing world per unit of GDP.
We see overall global energy use growing by about 40 percent by 2020
And, inevitably, most of the energy that will be used for many decades will continue to be from fossil fuels: coal, oil and natural gas. For a variety of reasons, we expect fossil fuels to provide about 80 percent of the energy used in 2020, and to increase – and I emphasize increase – in absolute magnitude by about 65 million oil equivalent barrels per day.
Just how much is 65 million barrels per day? Well, it is close to eight times Saudi Arabia’s current crude oil production.
At the same time, non-fossil fuel use will also increase, but only by about 8 million oil equivalent barrels per day. We expect only modest growth for nuclear power and hydropower, despite advantages in terms of greenhouse gas emissions, as each faces siting limitations and environmental obstacles.
While there can be little doubt that wind and solar will grow rapidly, these start from a very small base and even with extremely rapid growth will only supply about one-half of one percent of the world’s energy in 2020.
The predominant energy sources will remain oil and gas, because with current technology these are at once both the least expensive and the most versatile. These are significant advantages and have proven to be enduring.
Now some will ask if we might be understating the roles for solar or wind or hydrogen in this two-decade outlook. And I can understand the question, because these as well as biofuels have enormous federal subsidies designed to accelerate their market penetration.
These are several reasons behind our outlook on these alternative energy sources:
Currently, ethanol from corn is neither an economic or energy- efficient choice, as it can require more energy to produce than it generates in the end. And it relies upon using significant land areas, land that would otherwise go to food crops or forest cover.
To give you some perspective, if we tried to replace just 10 percent of the gasoline the U.S. will use in 2020 with corn-based ethanol, we would need to plant an area equivalent to Illinois, Indiana and Ohio solely to grow the grain needed as feedstock. The difficulty of that can be appreciated when you realize that this area is about one-sixth of the land we currently use in the United States for growing all our crops.
Solar and wind have other challenges. Wind power is usually more expensive than fossil fuels, though its costs can be competitive under ideal conditions. It is constrained by being site limited, intermittent and subject to growing objections due to its undesirable visual and noise impacts on the landscape.
Solar power is of course an energy source of significant potential, but it is currently far more expensive than fossil fuels, and also suffers from being intermittent. After all, the sun does go down every day .
Outlook Implications
First and foremost, the rest of the world and the U.S. will increasingly need energy from the Middle East. This is not a matter of ideology or politics – it is simply inevitable. A widely respected industry periodical estimates that about 50 percent of proved worldwide oil and gas reserves reside in the Middle East, with Saudi Arabia alone having about one-fifth of the world’s oil reserves. We need to accept the reality of this rather than undertake expensive and risky steps trying to avoid it.
Without question the key to hedging the risks for America’s and the world’s energy future remains broadening the base of geographic locations from which we get our oil and gas. We should not fall into the trap of imagining that the U.S. can divorce itself from global energy markets.
We periodically hear calls for U.S. energy independence, as if this were a real option. The fact is that the United States is a part of the world energy market, and we must participate and compete in that market. And we need to recognize the rest of the world will also be petroleum importers – China, Japan, India, nearly all of Southeast Asia, all of Europe except Norway, and much of Latin America.
These countries are competing with us for access to the world’s supply pool. The U.S. has no guaranteed or preferential supply rights.
Similarly, we do not have the resource base to be energy independent. Even if we are prepared to develop more petroleum supplies here, we will still be far, far short of our needs. And in doing so, we simply cannot avoid significant reliance on oil and gas from the Middle East because the world’s supply pool is highly dependent upon the Middle East .
Many governments in the Middle East, Africa and other parts of the developing world, face enormous social needs. Yet they are also ill equipped to address those needs because they lack money and expertise and have institutional frameworks that are still maturing.
In some places, these governments continue to face strong internal dissent and armed opposition. Where we rely upon these countries for a considerable portion of our petroleum supplies, the risks that they face become our risks.
The United States therefore needs to continue a commitment to polices that recognize the challenges faced by many important oil and gas producing countries, policies that can play a significant role in addressing such challenges. [ed. i.e., trade liberalization and international financial institution participation in energy projects from the likes of the World Bank.]
(And) we need to muster the political will, based on a realistic energy outlook, to allow further development of the energy resources to be found in the United States. This includes those that may be offshore California and Florida, in the Rocky Mountains and in northern Alaska .
(If) we do not, as a nation, explore and develop energy from prospective areas in the U.S., and remain committed to use energy more efficiently, the consequence will be even greater dependence on energy from areas such as the Middle East. There is not realistic alternative, at least for the foreseeable future .
The energy investments required to meet the world’s growing demands will be huge.
For example, the International Energy Agency last year estimated that an average of $200 billion, or its equivalent in inflated dollars, would need to be invested each year to develop and supply the oil and gas that the world will need out to 2030. The investments required for power generation are even larger.
200 billion dollars annually is a lot of money, and the industry will need to compete with a host of alternatives available to investors for those funds. And it is investors that will be the primary determinants of whether the opportunities are attractive. At the same time, governments have much to do with creating the essential conditions necessary for favorable decisions by investors.
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Source: Woodrow Wilson International Center for Scholars / Exxonmobil.com
Hott Spotts will return June 24.
Brian Trumbore
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